Imagine everything’s on the line. There’s only three minutes left in the fourth quarter.
Jim CastigliaYou’re down 16-13 and need a game-winning drive of 92 yards. You must score a touchdown; a field goal won’t clinch a victory.
At one point during the drive, one of your linemen is too far down the field, resulting in a penalty that sets your offense back to the 45-yard line. However, your calm and collected Q-back hits your top wide receiver on a crossing pattern, resulting in a 25-yard gain to your opponent’s 20-yard line. Another pass grabs 10 more yards.
With only 34 seconds left to play in the game and the ball on the 10 yard line, your quarterback passes to one of your wide receivers in the end zone for a touchdown to gain the lead and win the game by four points.
This was Super Bowl 23 when Joe Montana and the San Francisco 49ers beat the Cincinnati Bengals. It was one of the most exciting three minutes in sports history.
Every Game Has a Language
Unless you’re a serious American football fan, you won’t understand what’s described above.
What’s my point? Every game has a language that describes the action involved in that game. Just think of everything from chess to poker to baseball. They all have a specific language. If you don’t know the language, you don’t understand the game (and can’t play it).
Business also has a language. The language of business is accounting. It enables an organization to communicate its effectiveness in achieving its goals.
Every “transaction” made in a business is translated and recorded into the business's three report cards: the balance sheet, the profit and loss statement, and the cash flow statement.
By mastering these three reports, you can make decisions. Decisions about the optimal use of your corporate assets like cash, accounts receivable, buildings, and equipment; decisions about sales revenue, expenses, and profit; and decisions about raising money to grow your enterprise and how to use the organization's assets optimally.
This essay will cover the basics of the three report cards and two questions you, as the owner or manager, can ask to help steer you in the right direction.
Report Card #1: The Balance Sheet
The balance sheet details what you owe and what you own. It’s a snapshot of a particular point in time; keep this in mind.
The balance sheet also tells you how liquid you are, i.e., can you pay your debts? A generally accepted standard is owning twice as much as you owe.
Report Card #2: The Income Statement
The next report card is the income statement, usually called “the P & L.” This is a “movie” rather than a snapshot. It reflects what happened over some time, like a month, quarter, or year.
It states the revenue the company generates (cash and credit sales) minus the expenses to show your profit. It shows a company’s economic performance.
Report Card #3: The Cash Flow Statement
The cash flow statement shows the actual cash moving into and out of your firm. While the P&L is a “theory” about how the business is doing, your cash flow statements are the “facts.”
Note that cash can enter a business in various ways. Your cash flow statement shows you where the cash is coming from. Is it coming from operations (the ideal), investors in the business, or lenders?
Two Powerful Questions
Here are two questions to ask when your numbers don’t hit the mark. I learned these when I studied with Keith Cunningham, the real rich dad of the Rich Dad Poor Dad book series by author Robert Kiyosaki. Keith runs a business empire and offers classes on business mastery in Austin, Texas.
- The first question is: What happened that shouldn’t have happened?
- The second question is: What should’ve happened that didn’t?
Dig deep to answer these questions anytime your numbers don’t add up. Financial understanding will help you run your business better and help you make better decisions. What more could you ask for?!
If you need assistance, contact me at my personal email, jvcastiglia@icloud.com, or at 949.338.7141.
Jim Castiglia is the founder of Business Street Fighter Consulting and supports entrepreneurial business owners in their desire to grow and maximize the value of their business. He can be reached by email at JimC@BSF.consulting or by phone at 919.263.1256. Visit www.BSF.consulting
